Tuesday, 4 October 2016

On September 13 and 14, the
Court of Justice of the European Union (CJEU) held its hearings for Opinion
2/15, which concerns the EU’s competence to conclude the recently negotiated EU-Singapore
Free Trade Agreement (EUSFTA). The CJEU convened in a rare sitting of the Full
Court of CJEU judges. It was presided by Judge Lenaerts and Vice-President
Tizzano, with Judge Ilešič fulfilling
the function of the Court’s Rapporteur. Mrs. Sharpston serves as Advocate
General.

This note offers a first-hand report on the
hearing and summarizes the exchange of arguments between the Commission, on the
one side, and the Council and the member states, on the other side. The first
section sets the stage by providing relevant contextual information to the
proceeding and highlights the systemic importance of the coming judgment.
Section II first outlines the main and general lines of reasoning that the
parties presented during the hearing. Secondly, we highlight a selection of
policy specific, novel, or even ‘curious’ legal arguments that were advanced by
the representatives of the Council and the Commission on the one, and the
members of the Court, on the other hand. Section III concludes this note with
one of many still unanswered, yet systemically highly significant legal
questions that surfaced in the course of the oral phase of the proceedings.
There's some further background to the case in an earlier
post on this blog.

I.The Crux of Opinion 2/15

“Does the European Union
have the ‘requisite competence’ to conclude the EU – Singapore Free Trade
Agreement [EUSFTA] alone?” More specifically, the Commission, in October 2014,
had asked the Court to clarify whether and which areas of the EUSFTA fall under
EU-exclusive, shared, or member states’ exclusive competences respectively.

The crux of the matter
brought before the Court lies exactly in this precise delineation of EU
external competences: If the content of the EUSFTA falls under EU exclusive
powers in its entirety, its conclusion as ‘EU-only’ would be mandatory. If
certain treaty provisions are regarded as exclusive national competences, the
agreement ought to be concluded as a ‘mixed’ agreement, including all EU member
states as independent contracting parties. If only EU exclusive as well as
shared competences were touched upon by the FTA, the decision to propose the
conclusion (on behalf of the Commission) and to conclude the agreement (on
behalf of the Council) as either ‘EU only’ or ‘mixed’ is legally optional and
referred to the political discretion of the EU institutions involved in the applicable
procedures set out in Article 218 TFEU (the general rules on EU negotiation and
conclusion of treaties) in conjunction with Article 207 TFEU (the provision on
the EU’s Common Commercial Policy).

The importance of the
Court’s judgment for the governance of EU commercial relations with third
countries – in particular the controversial EU/US trade deal (‘TTIP’) and EU/UK
trade relations after Brexit – can hardly be underestimated. Given the broad
and deep material coverage of the EUSFTA, the judgment will serve as a
precedent for the conclusion of the vast majority of future EU trade and investment
agreements. As such, the Court judgment in Opinion
2/15 could possibly mark the beginning of the era of ‘EU-only’ trade and
investment agreements and, conversely, the end of the EU member states lengthy
parallel ratification procedures required by ‘mixity’. As mirrored by the
inter-institutional political debate on the legal status of the EU Canada
Comprehensive Economic Trade Agreement (CETA), the eventual outcome of Opinion
2/15 has important implications on both the efficiency, reliability and
credibility of EU trade and investment policy formulation, on the one hand, and
the de jure legitimacy of multi-level
economic governance in the European Union, on the other.

II.Commission vs. Council and
the Member States: The Arguments

Throughout the course of
the hearing, the arguments of the parties focused on four contentious policy
areas covered by the EUSFTA, notably disciplines on transport, investment,
intellectual property rights, as well as sustainable development (labor rights
& environmental protection). In the following, we will first outline a
number of general legal arguments advanced by the parties that recurred during
the hearing in application to all or most issue areas and discernably built on
established CJEU case law. Subsequently, we highlight a selection of specific legal
constructions that the parties put forward in respect of EUSFTA transport and
investment rules.

1.General Arguments of the
Parties

a.The Commission

As a first and predominant
line of defense, the Commission representatives articulated a number of general
arguments that aim at fitting the content of the EUSFTA, in its entirety,
within the scope of the EU’s exclusive Common Commercial Policy (CCP) competence
– Article 207 TFEU – as well as within the ambit other exclusive EU competences
that can be implied in accordance with Article 3 (2) TFEU.

As such, the Commission
proposed the broadest possible conceptual interpretation of the ordinary terms
of Article 207, seeking to attribute maximum meaning to the expansion of CCP
powers by the Lisbon reform of 2009, which saw the addition of services,
foreign direct investment, and trade related intellectual property rights to
the scope of CCP exclusive external powers.

Secondly, the Commission
relied on a broad application of the ‘centre of gravity’ theory, which the
Court had developed in its case law. The theory’s ‘predominance-test’ requires
the use of a single legal basis where one of the aims and components of a
measure “is identifiable as the main [one], whereas the other is merely
incidental” (COM representative in reference to Case
C-377/12,
concerning the legal base of the EU partnership agreement with the Philippines).
In this way, the Commission defended EUSFTA rules as measures falling under
Article 207 where they “specifically [relate] to international trade in that
[they are] essentially intended to promote, facilitate or govern trade and
[have] direct and immediate effects on trade” (COM representative in reference
to Case C-414/11 - Daiichi Sankyo).

Third, the Commission
representatives made frequent use of the provisions of Article 3 (2) to
advocate for implied exclusivity of otherwise shared competences. In
codification of settled ERTA case law, Article 3 (2) TFEU prescribes EU
exclusivity in case “the scope of EU rules may be affected or altered by
international [member state] commitments where such commitments are concerned
with an area which is already covered to a large extent by such rules” (Opinion
1/13, on the Hague Convention on child abduction, in reference to
Article 3 (2) TFEU, 3rd situation). Otherwise, EU exclusive
competence may be implied where the “attainment of the Community objective [is]
inextricably linked to the conclusion of the international agreement” (Opinion
1/03 on the Lugano Convention on civil jurisdiction, codified in
Article 3 (2) TFEU, 2nd situation).

Building on these three main
lines of argumentation, the Commission developed a number of specific arguments
in support of EU exclusivity in regard of foreign direct investment (FDI)
protection and intellectual property rights (first, second, and third argument),
sustainable development disciplines (second argument), and areas otherwise
covered by EU rules to a large extent, such as maritime transport (second and
third argument).

Yet, the Commission found
it necessary to draw a second line of defense: in the alternative to full EU
exclusivity, it held that the EUSFTA concerned EU exclusive and shared
competences only. As such, the conclusion of the EUSFTA as ‘EU-only’ or ‘mixed’
would remain optional – or facultative - in accordance with the procedural
rules of Article 218 TFEU in conjunction with Article 207 TFEU.

b.The Council and the Member
States

Living up to observers’
expectations, the Council and the member states’ representatives attacked the
Commission presumption of EU exclusivity on various general and issue specific
grounds, with an ubiquitous reference to the principle of conferral, which is
set out in Article 5 (2) TEU. The EUSFTA concerned, in addition to the EU
exclusive competence under Article 207 TFEU, both shared as well as exclusive
member states’ competences. In consequence, “mixity is a must” for both the
Council and the member states.

In particular, the Council
and the member states demanded a narrow text based interpretation of Article 207
TFEU. Secondly, both Council and member states advocated for a restrictive
employment of the ‘center of gravity’ theory that, in its application, needed
to rest upon “objective factors amenable to judicial review” (member states
representatives in reference to Case C—411/06, Shipments
of Waste).
More than once, the representatives of various parties referred toOpinion
2/00, on the Cartagena
Protocol, in
which the Court decided that “[w]hatever
their scale, the practical difficulties associated with the implementation of
mixed agreements (..) cannot be accepted as relevant when selecting the legal
basis for a [Union] measure”.Instead, the Council and the member states advocated on several occasions
that the choice of the legal basis should take account of the Court’s reasoning
in Case C-411/06, where it was held that“[e]xceptionally, if (…) it is established
that the act simultaneously pursues a number of objectives or has several
components that are indissociably linked, without one being secondary and
indirect in relation to the other, such an act will have to be founded on the
various corresponding legal bases”.

Third, the parties argued
in favor of restrictive reading of implied exclusive competences under Article
3 (2), 3rd situation, in that respective conclusions required a
“comprehensive and detailed analysis of the relationship between the envisaged
international agreement and the EU law in force” (Council and member states
representatives in reference to Opinion
1/13).

Following these more
restrictive of the possible realm of interpretative approaches, the Council and
the member states concluded that member states remained exclusively competent
for maritime transport, FDI protection, portfolio liberalization and protection
and (alleged) non-commercial aspects of intellectual property rights
protection. Moreover, the parties held that the EUSFTA’s disciplines on labor
rights and environmental protection established various independent and
non-incidental aims and objectives that required reference to multiple legal
bases in the TFEU.

2.Policy-specific Arguments
of the Parties

Up to until this point,
arguably, the Commission, on the one side, and the Council and the member
states, on the other, walked on trodden paths of EU primary law interpretation
and established case law, in application to an economic treaty of unprecedented
scope and depth and a constantly evolving EU internal legislative status quo. In
the following few paragraphs, we highlight a selection of rather unconventional
and even curious policy-specific arguments in the areas of transport and
investment that may yet move the needle on the evolution of EU external
exclusive competences.

a.Transport

In the area of transport,
the Commission notably questioned the scope of the carve-out Article 207(5),
which exempts “the negotiation and conclusion of international agreements in
the field of transport” from the TFEU provisions of the CCP. In a remarkable construction,
the Commission argued that the addition of foreign direct investment to the
terms of Article 207(1) via the Lisbon Treaty reform of 2009 had moved mode 3 of transport services provision
as defined by WTO law, i.e. establishment and FDI, back into the scope of the
CCP. Mode 1, 2, and 4 (movement of the service itself, movement of service
recipients and providers) remained outside of the CCP’s legal basis as regards
transport. The EU, however, was now exclusively competent for the negotiation
and conclusion of agreements liberalizing and protecting foreign direct
investment in all sectors, including transport. The Council and member states
cried foul in reference to Opinion
1/08, in which the CJEU ruled that transport was fully exempted from
the CCP, and which remained “good law” even after the Lisbon reforms and
protected the full integrity of the 207(5) transport carve-out from the CCP.
The Commission, in view of the parties, was victim of its own faulty logic
reasoning. Any exemptions from Article 207 (5) would deprive the provision of
its effectiveness.

In the area of maritime
transport services, the Commission advocated for implied ERTA exclusivity
(Article 3 (2), 3rd situation TFEU) based on Regulation
4055/86. The Regulation prescribes broad mode 1 liberalization between EU
member state nationals established in EU member states and third countries but does
evidently not afford any liberalization commitment to nationals of third
countries. The Council and member states hence pointed at the missing pieces
for a comprehensive EU internal legal framework for transport services that
could otherwise confer implied Union exclusivity. The parties further argued
that the wide-ranging EUSFTA disciplines and objectives in this field were not
incidental or subordinate to the commercial treaty objectives. Maritime
transport services, in the view of the parties, remained a shared competence in
accordance with Article 4 (2) (g) TFEU. Moreover, member states remained
exclusively competent in regard of the regulation of third country vessels
operators.

Inspired by this exchange
of arguments, Advocate General Sharpston addressed the Council with a question
of systemic relevance: What is, at the end, the decisive criterion or the threshold
for the conclusion of an EU agreement in a field that is internally only partly
covered by common rules, such as maritime transport? How many “hoops”,
Sharpston asked, does the Commission have to “jump through” to prove EU
exclusivity to the Council? Mrs. Sharpston further questioned whether internal
exclusivity was a necessary condition for external exclusivity of competences.
The Council, in response, denied that internal exclusivity was a conditio sine qua non but insisted on “strict
conditions” for the conferral of implied exclusivity that were set out in
Article 3 (2) TFEU. Moreover, the Council advocated for an application of the
gravity theory that advanced “clear dividing lines”.

b.Portfolio Investment

In a genuinely novel line
of reasoning, the Commission advanced a treaty interpretation that would
justify the implied exclusivity of Union competence over portfolio investment
(ie, the purchase of non-controlling shares in companies), which is not
included in the ordinary meaning of the term ‘foreign direct investment’ in
Article 207 (1) TFEU. In doing so, the Commission departed from the otherwise
currently uncontested notion that existing secondary
EU legislation is the only contingency that can trigger an ‘ERTA effect’. The
‘ERTA effect’ confers exclusive competence in areas where member states
exercise of external competence would otherwise affect already existing or even
prospective ‘common rules’ (Art. 3 (2) 3rd situation TFEU). Such
‘common rules’, according to the Commission, however, could also take the shape
of EU primary law. With reference to
Article 63 (1) TFEU, the Commission representatives voiced the opinion that the
treaty-prescribed freedom of capital movement between member states (as well as
member states and third countries) sufficed to constitute ‘common rules’ within
the meaning of Article 3 (2) TFEU. The possibility of member states concluding international
agreements that affected the prohibition of restrictions on capital movements
as codified in Article 63 (1) implied EU exclusive external powers in this
area. The Union was therefore exclusively competent for the negotiation and
conclusion of agreements covering rules on portfolio investment liberalization
and the protection of such investments.

In the alternative,
according to the Commission, portfolio investment liberalization falls under
the Union’s shared competences.

The Council and the member
states took pains to counter the Commission’s line of reasoning with a larger
number of sometimes diverging arguments. First and foremost, the parties noted
the fact that that Article 63 (1), by itself, only codifies a prohibition of
restrictions, but falls short of conferring legislative powers upon the Union.
Using Article 63 (1) TFEU as a legal basis for external action was merely a
“legal fix” that constituted an instance of “legal imagination” on behalf of
the Commission. To the Council, it appeared inconceivable that a provision,
which did not suffice as a basis for internal legislation could imply an
(exclusive) external competence. Only the exercise of an internal competence
may pre-empt external member state
action. Belgium and Germany, secondly, took the stance that such a wide
interpretation of Article 3 (2) 3rd situation TFEU facilitated an undue
circumvention of the deliberate choice of the treaty makers to exclude
portfolio investment from the scope of Article 207 TFEU and Article 64 TFEU.
The two parties insisted on exclusive member state competence for portfolio
investment. The representatives of Finland and Slovenia, on the other hand, appeared
to suggest that the member states may share external powers with the Union in
this area.

Countering the Council’s attack,
the Commission, in response to an oral question asked by the Court, held that
there was a “simple but very good reason” for the fact that the treaties did
not codify a legal basis for the internal
liberalization of portfolio investment: Article 63 (1) TFEU itself prescribed a
comprehensive prohibition of restrictions to that end.

In another unprecedented
interpretation of the treaties, the Commission cited Article 216 (1) in
conjunction with Article 63 (1) TFEU as the correct legal bases for external Union acts that covered
portfolio investment liberalization. The Council and several member states, in
contrast, insisted that Article 216 (1) TFEU only conferred general
treaty-making powers upon the Union and was unsuitable to serve as a legal
basis for the conclusion of international agreements by the EU.

Upon inquiry of Judge
Rapporteur Ilešič, the Commission and
Council representatives found themselves in a rare moment of agreement to the extent that
Article 64 TFEU could not serve as a legal basis for the internal liberalization of portfolio investment. According
to the Commission, the harmonization
of EU internal rules on portfolio investment could, however, “maybe” be based on Article 114 or 352 TFEU –
a statement that inspired the Court’s President Lenaerts to remind the
Commission of the fact that the choice of the correct legal basis for a Union
act was not “à la carte”.

In light of the circumstance
that the Commission partly relied on a legal basis for an external competence,
which allegedly did not require its internal exercise ex ante, Advocate General Sharpston questioned the Commission on
the precise difference between the third situation governed by Article 3 (2)
TFEU (as referred to by the Commission) and the second situation provided for
by the same rule. Mrs. Sharpston’s enquiry, however, remained unanswered.

Secondly, the Advocate
General questioned the Commission’s perception of the risk that member state
agreements could ‘alter the scope of common rules’, whereas the common rules
that the Commission referred to were in fact EU treaty provisions. The only way
to alter the scope of primary law, Sharpston stated, was a treaty reform via
the applicable constitutional provisions. In response, the Commission, in
reference to the terms of Article 3 (2) TFEU, clarified that its argument did
not extend to the alteration of the
scope of treaty rules, but to the probability that the primary legal norm of
Article 63 (1) could be affected by independent
international member state agreements.

c.Termination of Member
States’ Bilateral Investment Treaties

Another point of legal
debate that prominently featured in the hearing concerned the supersession,
suspension, and termination of existing member states’ bilateral investment
treaties with Singapore once the investment protection provisions of the EUSFTA
will be provisionally applied or enter into force when the treaty is concluded.
Article 9.10 EUSFTA provides that member states bilateral investment treaties “shall cease to have effect and shall be replaced and
superseded by this Agreement”. A footnote to this provision stipulates that “the
agreements between Member States of the Union and Singapore […] shall be
considered as terminated by this Agreement, within the meaning of subparagraph
1(a) of Article 59 of the Vienna
Convention on the Law of Treaties.” Yet, article 59 (1) VCLT prescribes
that “a treaty shall be considered as terminated if all the parties to it
conclude a later treaty relating to the same subject matter and: (a) It appears
from the later treaty or is otherwise established that the parties intended
that the matter should be governed by that treaty”.

While the Commission argued that past EU practice entailed
an array of precedents for the supersession of member state treaties by EU
external agreements, Judge Rapporteur Ilešič and Advocate General Sharpston questioned the appropriateness of
the chosen legal modality as well as the EU competence for the termination of
member states’ bilateral investment treaties (BITs) with Singapore via Article
9.10 of the EUSFTA. Both the Judge Rapporteur and the Advocate General,
advanced a, however, unanswered request for a clarification as to whether the
Commission wanted to argue in favour of the termination of the BITs via the
duty of sincere cooperation enshrined in Article 4 (3) of the TEU. Otherwise,
how would the Commission argue that it can include a provision in an ‘EU-only’
agreement that effectuated not only the succession but also the termination of
member state bilateral agreements with Singapore under international law, given
that the EU is not a contracting party to these agreements?

III.Concluding Remarks

Opinion 2/15 raises a vast amount of general as well as policy
area specific legal issues that are – in aggregate and in some instances
individually - of tremendous importance for the delineation of EU competences
vis-à-vis the Union’s member states. The significance of the Court’s judgment
very much transcends the question of whether the EUSFTA is characterized as an
‘EU-only’ or a ‘mixed’ agreement in its entirety. Rather, the Court’s much
awaited clarifications will have both systemic horizontal as well as policy
area specific vertical implications for the operation of the EU’s legal system and
its external relations. Moreover, the
judgment will likely clarify and may redefine the role and reach of the member
states’ presence in the Union’s external economic relations in adaptation to
the primary law reforms of the Lisbon Treaty, constantly evolving EU internal
secondary legislation, and the expanding scope and depth of 21st
century trade and investment agreements.

We conclude this note with
a question posed by the British Advocate General Mrs. Sharpston, at the very
end of the hearing, to all parties. The question, however, remained unanswered.

If the Court, in Opinion 2/15, held that the EU-Singapore
FTA is a mixed agreement, what would be the consequence for the conclusion of
the treaty? Given the extensive scope of EU exclusive powers under the CCP, could
a single member state veto the entire agreement?

David Kleimann and Gesa Kübek

Passau, October 4th, 2016

Barnard & Peers: chapter 24

Photo credit: www.cnaint.com

* David Kleimann is a Researcher at the Law Department of the
European University Institute (EUI) in Florence (david.kleimann@eui.eu). Gesa Kübek is a Research Assistant at
the Law Faculty of the University of Passau (gesa.kuebek@uni-passau.de).
This report is based on hand-written notes that the authors prepared during the
hearing. All potential errors are attributable to the authors alone.

Thank you for your interest in the report, Wybe. We will publish an article on "The Signing, Preliminary Application, and Conclusion of Trade and Investment Agreements in the EU - The Case of CETA and Opinion 2/15" very soon. There, we discuss the question raised by the AG in some detail. We will send you the paper as soon as it is out.

Dear David, thank you for the report. I find it very, very interesting and it opens a lot of questions about the future of FTAs. CETA is a clear example of the problematic nature of mixed agreements. When do you plan to publish the above-mentioned article?

Dear Kostadin, thank you very much for your comment and the kind words. My apologies for the late reply. We published the EUI Working Paper last week. You can access it here: http://cadmus.eui.eu//handle/1814/43948 Best, David

Dear Gesa and David, thank you for the interesting report. One other issue that came to me while reading the report is the expectation that, with Brexit, the negotiations for the Mercosur-EU trade agreement will speed-up, since the common agricultural policy, the topic which prevents the execution of the agreement is not an issue of the British's concerns. So, in Mercosur's perspective, Brexit has oppened a path to deal or exclusively with England (without the problems represented by the CAP), or to get a better deal from the EU countries. Even though the execution of this agreement might not be a priority under the current political scenarium of the EU, this particular situation also demonstrates that, for countries outside the E.U. Brexit might represent some leverage to bargain conditions betweem the E.U and England, specially when those agreements would have similar benefits, regardless the signatories (U.K or E.U), when,for instance, the third-country is looking for obtaining a benefits related to services or goods that are comparable in both areas. Great topic!

Dear Arthur, thank you very much for your very interesting comment and the important perspective that you provide. I would assume that the Commission's Brexit negotiator and the relevant services in the Commission will take this scenario into account when negotiating the terms of the British departure, as well as in ongoing negotiations with MERCOSUR. My best guess is that, now more than ever, COM will delay and backload an agreement with MERCOSUR on agricultural tariffs and TRQs for both practical and tactical reasons, and adapt respective commitments to the outcome of parallel Brexit negotiations. In any case, I agree with you that it will be easier for MERCOSUR to negotiate an agreement with the UK alone, both because of complementarity of the trade portfolios that you mention, and shifting power asymmetries in favor of MERCOSUR. Once the UK has its own WTO tariff, tariff-rate quota, subsidies, and services schedule of concessions that is. The fact that the UK currently doesn't have such schedules, and thus lacks a negotiation baseline, will, in my view, delay any negotiation or agreement with MERCOSUR for at least another two years after the May government triggers Article 50 TEU - a circumstance that plays into the hands of the Commission's MERCOSUR negotiators. But there are diverging positions on the UK's WTO status. Peter Unphakorn's and Lorand Bartels' ICTSD articles may best exemplify the two ends of this ongoing debate. Yet another thrilling subject of this saddening storyline.

I would have supposed that answer to the last question from the Attorney General would be a simple 'yes'. If a Member State is not willing to sign, then it can't go ahead. The Commission and Singapore would then (I would have supposed) be at liberty to renegotiate it, if possible, removing the parts for which unanimity could not be reached.

But from the way you left the question hanging, I infer that it is not as simple as that. I would be interested to learn why this is. Thanks, Andrew

Dear Andrew - thank you very much for your comment and my apologies for the late response. We have addressed AG Sharpston's question in the EUI Working Paper, which we published last week, and which you can access here: http://cadmus.eui.eu//handle/1814/43948

In our paper, we elaborate on the view that EU member states can only veto the signing and conclusion of those parts of the agreement that do not fall within the scope of EU exclusive competence. We outline two scenarios, in which a facultative mixed agreement can be concluded even if opposed by an individual member state government. pp. 22-24 Best, David

I would like to find out the relationship between two issues:i) Is unanimity needed in the Council? - Article 218(4) TFEUii) Can the Agreement be concluded with the EU only, or do the Member States have to sign it too? I believe this is the same as asking whether it is mixed or not.

Do the two sets of criteria tend to catch the same type of provisions in an FTA? Are the two issues separable in principle? Are all 4 permutations possible? -:a) simple, QMVb) simple, unanimityc) mixed, QMVd) mixed, unanimity.

The questions are what the CJEU will answer - particularly the second question. We can only speculate on what it will say at this point. And all four permutations are possible, not necessarily in a pure trade agreement, but once trade is combined with another legal base. It's only theoretical to talk about a mixed agreement where unanimity applies, because there would be de facto unanimous voting.

Very interesting analysis. Wrote my LLM thesis on issues with IP and the "mixed" agreements (i.e. the TTIP) in early-mid 2016. Wish I had had some of this material available then. The fact that the Commission did not answer properly to the AG's question can be seen as a sign of the fact that this is exactly what is a key concern. From an economical perspective, which is often mentioned by those in favour of the FTAs, there is still no properly verified proof that FTA's like the TTIP provide for any economic or other benefit or improvement for anyone outside of the international corporate environment either in the short or long run.